Welcome to the fourth session of our 50 Days Finance Challenge! Today, we’re diving into one of the fundamental concepts of investing — Face Value per Share. Whether you’re a seasoned investor or just starting your journey, this topic is crucial for understanding the dynamics of the stock market and how it can affect your investments. Let’s break it down step-by-step!
What is Face Value?
If you've ever bought shares or explored stock prices, you've probably encountered the term face value more than once. But what does it really mean?
In simple terms, face value is the nominal or original value of a share when it’s issued by the company. It’s also known as par value and is typically a small amount, such as ₹1, ₹2, ₹5, or ₹10. Historically, before the advent of dematerialization (the process of converting physical shares to electronic ones) in the 1990s, this value was printed on the share certificate. However, now that most shares are held electronically, the term has stayed, but there’s no physical certificate to show it.
Why is it called face value?
It’s called "face value" because, in the old days, it was literally the number printed on the face of the share certificate. But today, it's simply a reference to the nominal value of the stock.
For example, if a company issues shares at a face value of ₹10, it means each share is worth ₹10 at the time of issuance. But here’s where it gets interesting: the market price of the stock can differ significantly from this nominal value. This difference is called the premium
How Face Value Affects Share Issuance?
Let’s illustrate with an example:
Suppose a company issues shares with a face value of ₹10, but the actual price at which those shares are sold in the market is ₹70. The ₹60 difference is known as the premium. This premium is influenced by factors like the company’s market presence, performance, and future potential, all of which are reflected in the market price.
In the company’s balance sheet, the total equity share capital is calculated by multiplying the face value by the number of shares issued. The premium amount is shown separately under the share premium column.
Let’s say the company issues 1,00,000 shares at ₹70, with a face value of ₹10. The equity share capital will be ₹10 × 1,00,000 = ₹10,00,000 (₹1 crore). The share premium will be ₹60 × 1,00,000 = ₹6,00,00,000 (₹6 crore).
The Role of Face Value in Dividend Calculation
One of the most important aspects of face value is its direct impact on dividend calculation. Companies often declare dividends as a percentage of the face value.
For instance, if the face value of a share is ₹5 and the company announces a 50% dividend, you’d receive ₹2.50 per share as a dividend. However, in recent times, companies have moved away from percentage-based dividends and now declare them in absolute terms (e.g., ₹7.50 per share). This makes things clearer for investors since the amount you’re receiving is fixed, not a fluctuating percentage.
Face Value vs. Market Value
It’s important to distinguish between face value and market value:
- Face Value: This is an internal accounting value, set when the company issues shares. It doesn’t change unless the company undergoes a stock split or reverse stock split.
- Market Value: This is the price at which the stock trades in the open market, and it can fluctuate based on supply and demand, company performance, market sentiment, and other factors. For instance, the face value of a share of LIC might be ₹10, but the market value can be over ₹1000.
Stock Splits and Reverse Stock Splits
Companies can adjust their share prices by issuing stock splits or reverse stock splits:
- In a stock split, a company divides its existing shares into multiple new shares, lowering the price of each share. For example, if a company with a ₹10 face value share decides to split its stock 1:10, the new face value will be ₹1, and the number of shares will increase tenfold.
- In a reverse stock split, the company consolidates shares, increasing the face value and reducing the number of shares. This doesn’t affect the company’s overall market capitalization, but it can make the stock price more attractive if it’s trading at very low levels.
Real-Life Examples of Face Value in Action
Let’s take a look at a few real-life examples:
- Reliance Industries Ltd.: Reliance shares trade in thousands, but the face value of each share is just ₹10. This means the market price of Reliance shares is far above their face value due to the company's performance and market potential.
- Tata Consultancy Services (TCS): TCS shares have a face value of just ₹1, but the market price is much higher. This again reflects how the market values the company's performance and growth potential.
The Impact of Face Value on Bonds and Debentures
Face value is also crucial for bond and debenture holders. For bonds, the face value determines the amount that will be paid back to the bondholder at maturity. The coupon (interest) is often calculated based on this face value. So, for bondholders, understanding the face value is critical when assessing the returns on their investment.
Key Takeaways
- Face value is the nominal value of a share issued by the company, and it typically remains constant unless there is a stock split or reverse split.
- Market value is the price at which a stock trades in the open market and is determined by market forces like supply and demand.
- Dividend calculations are often based on face value, though companies now declare dividends in absolute terms for clarity.
- Stock splits and reverse splits can adjust a company’s share price while keeping the overall market cap the same.
Understanding face value helps you better grasp the financials of a company and make more informed decisions as an investor. By knowing how it interacts with market value, dividends, and corporate actions like stock splits, you can become more strategic in your approach to investing.
Stay tuned for the next session in our finance challenge as we continue exploring more essential concepts to enhance your investment knowledge!
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